Tuesday, August 2, 2011

We are screwed

He stated everything that I wanted to say and did a better job of it. They say compromise is good, but not on this. All it does is give them more money to blow on various vote buying schemes. The government needs massive reform, all they did was kick the can down the road past the 2012 elections. We need massive reform, the congresscritters are more concerned about re-election and keeping their privilege rather than what is proper for the country. We need part time politicians, not full time. That is the problem today.

I'm too disgusted by today's political developments to even try to post general blog stuff tonight. Instead, let's take an honest look at what the 'agreement' between the President, the Senate and the House of Representatives means for you and I. I can put it very briefly - in two words, actually.

We're screwed.

Sorry to be so blunt about it, but that's the reality of the situation. We can now confidently expect the US economy to implode in one of two ways:

EITHER the debt burden will grow so large that it absorbs most of the national budget in interest and debt service payments, crippling all other government expenditure; OR -

The Treasury will deliberately print so many more dollars to service our debt requirements, in what it will doubtless call 'Quantitative Easing 3' (and 4, and 5, and 6, and . . . ), that inflation will almost completely erode the value of our currency, destroying any hope of prosperity for the middle and working classes of America.

Please understand this very clearly. ONE OR THE OTHER OF THOSE OUTCOMES IS ALMOST CERTAIN. It can only be avoided by a reversal of direction of the nation's economic policy. That cannot and will not happen unless and until we elect - in the short term - a Congress, Senate and President who are both aware of economic reality, and will act upon it. If they do, the reversal of direction will at best produce a prolonged, painful and extremely bitter recession. If they don't, one or the other of the outcomes listed above becomes inevitable.

The 'agreement' announced yesterday is a sham, a fake, a public lie, and a fraud perpetrated upon the American people. Note the three biggest lies it contains:

LIE #1: Spending has been reduced. There is no reduction in spending whatsoever. The only reduction is in the rate at which US government spending will increase. What the politicians are promising us is that instead of increasing spending next year by (say) a hundred billion dollars, they'll increase it by only $90 billion, thereby 'cutting spending' by $10 billion. As even a half-wit can see, they're lying to us. They haven't cut actual spending by so much as a single cent.

LIE #2: The deal contains no tax increases. Guess what? The temporary tax cuts implemented by President Bush, and the cut in FICA presently in effect, both expire at the end of 2012. The Congressional Budget Office calculation of the budgetary impact of the newly-agreed deal expressly states: "As requested by the House and Senate leadership, CBO also calculated the net budgetary impact of the plans if the discretionary savings are measured relative to CBO’s January baseline projections." The January baseline projections expect those tax cuts to expire at the end of next year - which means an increase in taxation the following year. (It should bring in up to $400 billion in increased revenues, according to some analysts). Ergo, taxes will increase.

LIE #3: Spending cuts will take effect over the next ten years. Quite apart from the fact that there are no actual spending cuts at all (see Lie #1 above), no Congress can bind its successors. Any new Congress can pass a law, or spend money, at its whim and pleasure, irrespective of what its predecessors may have agreed. If an existing law inconveniently blocks such spending, it can be amended or abolished. Therefore, to say that spending cuts agreed today will take effect over ten years is to imply that future Congresses won't undo the cuts. If you believe that, there's a bridge in Brooklyn, NYC that I'd like to sell you. Cash only, please, and in small bills.

Let me try to put this reality in the context of a family budget, to make it clearer.

Let's assume that a family has a net income of $28,500 per year, but actually spends $50,000 per year. It's borrowing 43c, or 43%, of every dollar it spends. (That's precisely what the US government is doing right now.)

That family has been spending beyond its means for many years, running up an ongoing debt that's grown larger all the time. It's now accumulated a debt of 3.9 times its annual expenditure, or $195,000. This is, of course, almost seven times greater than its annual income of $28,500. (Those ratios are based on President Obama's 2012 budget request for $3.7 trillion dollars, compared to a current US debt of $14.4 trillion dollars - 3.9 times higher than the budget request.)

The family goes to its bank and promises to cut its spending next year. It's decided to spend only $49,000, instead of $50,000, thereby increasing its indebtedness by 'only' an additional $20,500 (instead of $21,500). Of course, it won't actually pay off any of its existing debt in the process. It has no assets to underwrite its indebtedness, except for its 'full faith and credit'. Will the bank kindly loan it the necessary funds for its 'reduced expenditure'?

If you think any bank would make such a loan, I submit you're living in cloud cuckoo land

Standard & Poor warned some weeks ago that if the USA was to avoid a downgrading of its credit rating, it would have to reduce the budget deficit by at least $4 trillion over the next three years, as well as raise the authorized debt ceiling. This agreement doesn't even come close, and I'm willing to bet that the 'bipartisan commission' established under the agreement won't get there either. Let's see whether Standard & Poor meant its warning. If it did, then by the end of 2011 the USA will lose its 'AAA' credit rating, making all borrowing - public and private - considerably more expensive.

What's even worse is that this agreement does nothing whatsoever to address the incredible, mind-boggling, almost unbelievable extent of the US government's unfunded liabilities. Forget the increase in the authorized debt limit - unfunded liabilities are more than four times greater than that limit. USA Today analyzed them in June 2011.

The federal government's financial condition deteriorated rapidly last year, far beyond the $1.5 trillion in new debt taken on to finance the budget deficit, a USA TODAY analysis shows.

The government added $5.3 trillion in new financial obligations in 2010, largely for retirement programs such as Medicare and Social Security. That brings to a record $61.6 trillion the total of financial promises not paid for.

This gap between spending commitments and revenue last year equals more than one-third of the nation's gross domestic product.

Medicare alone took on $1.8 trillion in new liabilities, more than the record deficit prompting heated debate between Congress and the White House over lifting the debt ceiling.

Social Security added $1.4 trillion in obligations, partly reflecting longer life expectancies. Federal and military retirement programs added more to the financial hole, too.

Corporations would be required to count these new liabilities when they are taken on — and report a big loss to shareholders. Unlike businesses, however, Congress postpones recording spending commitments until it writes a check.

The $61.6 trillion in unfunded obligations amounts to $528,000 per household. That's more than five times what Americans have borrowed for everything else — mortgages, car loans and other debt.

There's more at the link. Bold print is my emphasis. Further details may be found here. Needless to say, last weekend's agreement does nothing whatsoever to address - much less reduce - these unfunded liabilities. How do you feel, knowing that your household owes over half a million dollars as its share of unfunded US liabilities? Think you can simply refuse to pay your share, because you never agreed to the debt or signed off on it? Have fun explaining that to the IRS, and to the law enforcement agencies and officers who will implement its confiscation of your assets if you don't pay up on demand. (In that connection, I'm obliged to Karl Denninger for linking to an editorial in the Herald-Sun newspaper of Durham, North Carolina. The author points out that this weekend's agreement - or, rather, its consequences - may become the spark that ignites a new American Revolution. Go read it for yourself, and ponder.)

"To preserve our independence, we must not let our rulers load us with perpetual debt. We must make our election between economy and liberty, or profusion and servitude."

He was right. We didn't listen. We will now pay the price for ignoring him.

Another wise man was Rudyard Kipling. His poem 'The Gods Of The Copybook Headings' reminds us that old truths still hold true - and we ignore them at our peril. I'll close by reproducing it here, so that we may all ponder its truth . . . and know that those 'gods' are bearing down on us right now, in economic terms.

As I pass through my incarnations in every age and race,
I make my proper prostrations to the Gods of the Market Place.
Peering through reverent fingers I watch them flourish and fall,
And the Gods of the Copybook Headings, I notice, outlast them all.

We were living in trees when they met us. They showed us each in turn
That Water would certainly wet us, as Fire would certainly burn:
But we found them lacking in Uplift, Vision and Breadth of Mind,
So we left them to teach the Gorillas while we followed the March of Mankind.

We moved as the Spirit listed. They never altered their pace,
Being neither cloud nor wind-borne like the Gods of the Market Place,
But they always caught up with our progress, and presently word would come
That a tribe had been wiped off its icefield, or the lights had gone out in Rome.

With the Hopes that our World is built on they were utterly out of touch,
They denied that the Moon was Stilton; they denied she was even Dutch;
They denied that Wishes were Horses; they denied that a Pig had Wings;
So we worshipped the Gods of the Market Who promised these beautiful things.

When the Cambrian measures were forming, They promised perpetual peace.
They swore, if we gave them our weapons, that the wars of the tribes would cease.
But when we disarmed They sold us and delivered us bound to our foe,
And the Gods of the Copybook Headings said: "Stick to the Devil you know."

On the first Feminian Sandstones we were promised the Fuller Life
(Which started by loving our neighbour and ended by loving his wife)
Till our women had no more children and the men lost reason and faith,
And the Gods of the Copybook Headings said: "The Wages of Sin is Death."

In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: "If you don't work you die."

Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four
And the Gods of the Copybook Headings limped up to explain it once more.

As it will be in the future, it was at the birth of Man
There are only four things certain since Social Progress began.
That the Dog returns to his Vomit and the Sow returns to her Mire,
And the burnt Fool's bandaged finger goes wabbling back to the Fire;

And that after this is accomplished, and the brave new world begins
When all men are paid for existing and no man must pay for his sins,
As surely as Water will wet us, as surely as Fire will burn,
The Gods of the Copybook Headings with terror and slaughter return!

So it has always been. So it will be now. There's no escaping reality . . . despite all that our politicians may promise. Our only hope is to elect better representatives in 2012, people who understand economic reality and will do something about it. That can no longer prevent real economic hardship - it's too late for that - but it may minimize it. However, if we don't do so next year, there'll be no time to do so further down the road. We don't have that much time any more.

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